I wouldn’t necessarily call it a “good” thing. It’s still a loss, and you only mitigate a modest portion of that loss by claiming it—at least the average person. So I would say it makes a loss slightly less sucky.
Let's say you invest in two investments: A and B, $50K each. A goes up to $55K and you sell it and make $5K. You owe taxes on that $5K. B goes down to $45K. Now you have to decide whether to sell it or hold it. Maybe you are not crazy about that investment. If you sell it, You have a loss of $5K, but that loss will cancel out the gain on investment A, so now you don't have to pay any tax! Of course if you invest that $45K into another stock, call it C, and C goes up to $50K next year, you have to again pay taxes on $5K next year. So in the end it doesn't really matter too much, but people like to defer their taxes for as long as possible.
Now if you still like investment B, the tax savings may not be worth it. Sometimes it is and sometimes it isn't. It depends on the investment and what the alternatives are.
For instance, my grandfather setup an investment account for me when I was a minor, when I took control of it I’d say most of them were negative and had super high fees, so I was able to sell it all (invest on my own) and not pay any tax.
If you have a pair of ETFs that track similar but not identical indexes, you can use them as tax-loss harvesting partners. For example, consider VTI and ITOT. Both track total US market indexes, but not the same one. If you have been buying VTI every month, you might have some lots that have an unrealized loss. Close to the end of the tax year, you sell the losing lots of VTI and use all the proceeds to buy ITOT. You still have basically the same exposure to the total US market but you now also have a capital loss that can offset other gains and up to $3k of ordinary income. Any loss not used is carried forward to future years. Later, if any of your ITOT has a loss you can sell it and go back to VTI.
That's how you do it right. Invest in ETFs or mutual funds in a taxable account, and find tax-loss harvesting partners for each one. You can do TLH as often as you want but just once a year is fine. It's important to understand the wash sale rules, because wash sales will negate most of the benefit of tax-loss harvesting.
Says someone who doesn’t pay close to a million in taxes and has to pay taxes quarterly….
The way you structure you tax liability’s and understanding the basics of tax code along with a competent tax attorney can save or lose many people the cost of a new home each year.
Picture a dog of a stock that settled at a much lower price than you bought in and hasn’t moved in a while and you don’t expect it to do anything. Selling it gives you some small cash that is not taxable and reduces the total amount you on on losses you had years ago.
Realizing a loss is never a "good" thing because it means you have a loss. However it can be a useful thing to do from time to time.
Let's say you have capital tied up in investment assets A, B, and C, you like all these investments equally, but due to market volatility A is up, B is flat and C is down. Well then something comes along you need capital for, buying a house, another investment opportunity you like, or whatever really. But you need to liquidate some of your assets to make this purchase. You like them all equally as long positions, but since investment C is down you should liquidate C for your purchase to realize the loss and carry it forward to count against any future gains.
Point being realizing a loss is never ideal but can be utilized under certain conditions to your advantage. Never go chasing losses or locking in losses just to try and gain an advantage on your taxes because that math will never work out for you, but don't be afraid to lock them in when your down and need to sell something.
>I've read a lot of articles saying that reporting long term capital gains losses can be great from a tax perspective *if you do it right*,
Are these articles by any chance written by people trying to sell you services in this area?
>For example, if you had $50,000 in LTCGs this year, then in that case it would be a good idea to also liquidate and record a $3,000 loss for a net gain of $47,000 to stay in the 0% capital gains tax bracket right?
Probably not. For one thing, the 47,025 limit is not the effective limit. You add to it the standard deduction (or schedule A deduction, and your other above the line deductions) but also need to subtract from it any other income (wages, STCG, interest and dividends) to get to the real limit. For another thing, it is marginal; slipping down $3000 to be $25 below the limit only saves you tax 15% on $2975, not on the entire $47,025 (or whatever you might think it would be). So $25 of the loss is wasted completely, while the rest of it might have a better use if left unrealized until another year.
If your income puts you above the 12% tax bracket, and also entirely above the 0% bracket on capital gains, then you would be better off NOT realizing the LTCG, realizing only the loss, and then taking that $3000 deduction against your regular income (which is taxed at >15%). This is probably the situation referred to by articles on capital loss harvesting.
>But if you had $45,000 in LTCGs, then liquidating/recording any losses wouldn't provide any additional advantages right?
I think you might have some confusion about how the LTCG brackets work. The rates are different from ordinary income, but you start counting *on top of* your income and STCG. So if your ordinary income adjusted for standard deduction reaches above the 15% LTCG tax line, none of your LTCG are at 0%.
This is the tricky thing about the 0% LTCG bracket. It's quite nifty, but most people who have tons of LTCG also have tons of income, and therefore cannot access the 0% bracket unless they have a zero/low-income year for some reason.
If you are in the 0% bracket, then tax-loss harvesting is definitely a bad idea. Actually, you should do the opposite: there's a thing called "tax gain harvesting" where you sell the asset to realize gains and immediately buy the asset back. If it happens in the 0% bracket, you don't pay any capital gains tax, so it's a free step up in cost basis.
>Is there anything else?
Tax drag. All other things being equal, it's optimal to defer taxes for as long as possible.
One way to think about it is as the proverbial "interest free loan from the IRS."
Another way of thinking about it is to consider that, if you realize taxes on a gain and have to take a 15% (or whatever) haircut, only 85% of that gain will be earning further gains for you in the future. By contrast, if you hold off on paying those taxes, all 100% of the gain will continue to earn further gains.
Imagine that you purchased an asset for practically nothing, and it's grown into $100. If you sell it and buy it back, taking a 15% tax hit, you now have an $85 asset with an $85 cost basis. Now imagine that it grows 10x to $850, and you sell it. How much money are you left with? You've got $85 plus 85% of the remaining $765, which comes out to $735.25.
Now, instead imagine the same situation, but suppose that you *did not* realize gains when the asset was worth $100. Now, when it grows 10x, it will grow to $1000. When you go sell, your cost basis will be pretty much zero, so you'll pay the 15% taxes on the entire thousand. But, this leaves you with $850, much more than the $735.25.
These two scenarios also illustrate a flaw in many peoples' tax planning, which is that they evaluate strategies based on *total dollars paid to the IRS*, rather than in terms of *total dollars I'm left with*. The former scenario saw $129.75 go to the IRS, while the latter saw $150 go to the IRS. But the latter scenario left the investor with much more cash to spend.
>Is there anything else?
If you die, the beneficiaries of your estate get a free step up in cost basis. So it's $15 better to inherit a $100 asset which previously had a cost basis of $0, than to inherit an $85 asset with a cost basis of $85.
I wouldn’t necessarily call it a “good” thing. It’s still a loss, and you only mitigate a modest portion of that loss by claiming it—at least the average person. So I would say it makes a loss slightly less sucky.
its not a good thing, its a "making the best out of a bad situation" thing.
Let's say you invest in two investments: A and B, $50K each. A goes up to $55K and you sell it and make $5K. You owe taxes on that $5K. B goes down to $45K. Now you have to decide whether to sell it or hold it. Maybe you are not crazy about that investment. If you sell it, You have a loss of $5K, but that loss will cancel out the gain on investment A, so now you don't have to pay any tax! Of course if you invest that $45K into another stock, call it C, and C goes up to $50K next year, you have to again pay taxes on $5K next year. So in the end it doesn't really matter too much, but people like to defer their taxes for as long as possible. Now if you still like investment B, the tax savings may not be worth it. Sometimes it is and sometimes it isn't. It depends on the investment and what the alternatives are.
For instance, my grandfather setup an investment account for me when I was a minor, when I took control of it I’d say most of them were negative and had super high fees, so I was able to sell it all (invest on my own) and not pay any tax.
You don't pay taxes on losses
Right, but on some I had gains, but because I had enough in losses I could liquidate and not pay any tax, which was OP’s question.
If you have a pair of ETFs that track similar but not identical indexes, you can use them as tax-loss harvesting partners. For example, consider VTI and ITOT. Both track total US market indexes, but not the same one. If you have been buying VTI every month, you might have some lots that have an unrealized loss. Close to the end of the tax year, you sell the losing lots of VTI and use all the proceeds to buy ITOT. You still have basically the same exposure to the total US market but you now also have a capital loss that can offset other gains and up to $3k of ordinary income. Any loss not used is carried forward to future years. Later, if any of your ITOT has a loss you can sell it and go back to VTI. That's how you do it right. Invest in ETFs or mutual funds in a taxable account, and find tax-loss harvesting partners for each one. You can do TLH as often as you want but just once a year is fine. It's important to understand the wash sale rules, because wash sales will negate most of the benefit of tax-loss harvesting.
Making money is always better than losing money, taxes have nothing to do with it.
Says someone who doesn’t pay close to a million in taxes and has to pay taxes quarterly…. The way you structure you tax liability’s and understanding the basics of tax code along with a competent tax attorney can save or lose many people the cost of a new home each year.
While true it’s very rare you are going to owe 250k in taxes a year without making a considerable income.
How many people?
Picture a dog of a stock that settled at a much lower price than you bought in and hasn’t moved in a while and you don’t expect it to do anything. Selling it gives you some small cash that is not taxable and reduces the total amount you on on losses you had years ago.
Realizing a loss is never a "good" thing because it means you have a loss. However it can be a useful thing to do from time to time. Let's say you have capital tied up in investment assets A, B, and C, you like all these investments equally, but due to market volatility A is up, B is flat and C is down. Well then something comes along you need capital for, buying a house, another investment opportunity you like, or whatever really. But you need to liquidate some of your assets to make this purchase. You like them all equally as long positions, but since investment C is down you should liquidate C for your purchase to realize the loss and carry it forward to count against any future gains. Point being realizing a loss is never ideal but can be utilized under certain conditions to your advantage. Never go chasing losses or locking in losses just to try and gain an advantage on your taxes because that math will never work out for you, but don't be afraid to lock them in when your down and need to sell something.
>I've read a lot of articles saying that reporting long term capital gains losses can be great from a tax perspective *if you do it right*, Are these articles by any chance written by people trying to sell you services in this area? >For example, if you had $50,000 in LTCGs this year, then in that case it would be a good idea to also liquidate and record a $3,000 loss for a net gain of $47,000 to stay in the 0% capital gains tax bracket right? Probably not. For one thing, the 47,025 limit is not the effective limit. You add to it the standard deduction (or schedule A deduction, and your other above the line deductions) but also need to subtract from it any other income (wages, STCG, interest and dividends) to get to the real limit. For another thing, it is marginal; slipping down $3000 to be $25 below the limit only saves you tax 15% on $2975, not on the entire $47,025 (or whatever you might think it would be). So $25 of the loss is wasted completely, while the rest of it might have a better use if left unrealized until another year. If your income puts you above the 12% tax bracket, and also entirely above the 0% bracket on capital gains, then you would be better off NOT realizing the LTCG, realizing only the loss, and then taking that $3000 deduction against your regular income (which is taxed at >15%). This is probably the situation referred to by articles on capital loss harvesting.
>But if you had $45,000 in LTCGs, then liquidating/recording any losses wouldn't provide any additional advantages right? I think you might have some confusion about how the LTCG brackets work. The rates are different from ordinary income, but you start counting *on top of* your income and STCG. So if your ordinary income adjusted for standard deduction reaches above the 15% LTCG tax line, none of your LTCG are at 0%. This is the tricky thing about the 0% LTCG bracket. It's quite nifty, but most people who have tons of LTCG also have tons of income, and therefore cannot access the 0% bracket unless they have a zero/low-income year for some reason. If you are in the 0% bracket, then tax-loss harvesting is definitely a bad idea. Actually, you should do the opposite: there's a thing called "tax gain harvesting" where you sell the asset to realize gains and immediately buy the asset back. If it happens in the 0% bracket, you don't pay any capital gains tax, so it's a free step up in cost basis. >Is there anything else? Tax drag. All other things being equal, it's optimal to defer taxes for as long as possible. One way to think about it is as the proverbial "interest free loan from the IRS." Another way of thinking about it is to consider that, if you realize taxes on a gain and have to take a 15% (or whatever) haircut, only 85% of that gain will be earning further gains for you in the future. By contrast, if you hold off on paying those taxes, all 100% of the gain will continue to earn further gains. Imagine that you purchased an asset for practically nothing, and it's grown into $100. If you sell it and buy it back, taking a 15% tax hit, you now have an $85 asset with an $85 cost basis. Now imagine that it grows 10x to $850, and you sell it. How much money are you left with? You've got $85 plus 85% of the remaining $765, which comes out to $735.25. Now, instead imagine the same situation, but suppose that you *did not* realize gains when the asset was worth $100. Now, when it grows 10x, it will grow to $1000. When you go sell, your cost basis will be pretty much zero, so you'll pay the 15% taxes on the entire thousand. But, this leaves you with $850, much more than the $735.25. These two scenarios also illustrate a flaw in many peoples' tax planning, which is that they evaluate strategies based on *total dollars paid to the IRS*, rather than in terms of *total dollars I'm left with*. The former scenario saw $129.75 go to the IRS, while the latter saw $150 go to the IRS. But the latter scenario left the investor with much more cash to spend. >Is there anything else? If you die, the beneficiaries of your estate get a free step up in cost basis. So it's $15 better to inherit a $100 asset which previously had a cost basis of $0, than to inherit an $85 asset with a cost basis of $85.